The Wall Street Journal
Page C1
(Copyright (c) 1998, Dow Jones & Company, Inc.)
How to Sidestep a `Beardstown
Blunder'
When Calculating Portfolio Performance
By Karen Hube
You may have chuckled over the Beardstown Ladies ' error, which they admitted last week, in overstating their portfolio's performance. But now, stop to think about your own record as an investor.
Ah, yes, how quickly laughter turns to tears.
The truth is, the famous investment club of 14
older women from
The Beardstown Ladies achieved national fame for supposedly whipping most slick Wall Street types on portfolio returns. They sold 800,000 copies of a book touting average annual returns of 23.4% for the 10 years through 1993, published four other books, and have spoken publicly about their investing success nationwide. But last week the club conceded that an audit by Price Waterhouse shows its average annual return was actually a market-lagging 9.1%. (They did, however, return a respectable 15.3% annually from the club's inception in 1983 until 1997, the audit showed.)
Here are some lessons investors can learn from the Beardstown blunder:
You should know from the start that calculating your portfolio's return is likely to give you at least some measure of frustration. It's not simply a matter of checking your mutual funds' annual returns or monitoring the change in the size of your portfolio over a given period.
For one thing, funds' reporting periods are probably different from your investing period, and can therefore reflect much different returns. You must consider the exact starting dates of your investments, the timing and amount of all withdrawals, contributions and dividends, and the current value of each investment in relation to the portfolio as a whole.
The Beardstown Ladies apparently goofed by making an incorrect computer data
entry. This caused their 23.4% average annual return for 1991 and 1992 to be
counted as the performance for a full decade. Recording errors are a common
mistake, whether they are the result of putting in the wrong numbers or
forgetting to note withdrawals or contributions, says Malcolm Makin, a financial adviser in
Careful record-keeping is the first step to tracking your portfolio's performance. The next is a session with a calculator or some portfolio-tracking software.
For an approximate return, try the method created by the American
Association of Individual Investors in
While this method averages withdrawals and contributions, "it provides enough accuracy for investors to make intelligent decisions about their portfolio," says Mr. Markese. He says that "most of the time" results will be accurate within a 10th of a percentage point.
If you're moving large amounts in or out of your portfolio, or you want more precision, try one of the leading software packages.
National Association of Investors Corp., Madison Heights, Mich., sells portfolio-management software for individuals called Personal Record Keeper ($129; 248583-6242). To try it out, download a demo from the association's Internet site (www.better-investing.org).
Intuit Inc.,
Once you've finished your calculations, heed these wise words: "Double check before you share information about your returns," says Betty Sinnock, longtime treasurer of the Beardstown club.
The sudden proof that the Beardstown Ladies are as average as the next person when it comes to portfolio returns exposes one of investors' greatest weaknesses: They are suckers for the latest guru.
"Investors are disposed to look for gurus, and time and time again they
are shown that gurus don't exist," says Meir Statman, a finance professor at the
"The market bedevils investors," he says. "It is one of the most random machines ever, but people believe there is a non-randomness that they can exploit, and they ask, `Who is going to be my guide in telling me which pattern it is?'"
By comparison, the more reasonable and time-proven approaches to investing success -- diligent research, asset allocation, diversification, staying in for the long haul, and so on -- leaves a dry taste in many investors' mouths.
And let's face it, taking the beaten path can be boring.
But the danger in following popular wisdom, says
Experts suggest that investors pick an investing strategy that suits their risk tolerance and financial goals, "whether it's buying when there's blood in the streets, or going after growth," says Kevin C. Pilot, senior portfolio manager of Phoenix Capital Management in Carlsbad, Calif., and editor of the Vulture newsletter. "Then, if you want to go after a guru, find out who has a similar philosophy."
Use books or other literature published by your chosen guru to supplement your research, rather than as a sole guide.
The Beardstown Ladies have apologized for claiming inflated returns, saying they made a mistake. But incorrect numbers aren't always so innocent.
Unlike mutual-fund companies, whose methodology is monitored by the
Securities and Exchange Commission, a portfolio manager or investors touting
market-beating strategies can use a variety of methods to quantify their
supposed success, says Mark Hulbert, editor of the monthly newsletter, Hulbert
Financial Digest,
"There's a whole gray area where people aren't being outright dishonest, but they're not telling the whole truth," says Mr. Hulbert.
For example, an advertised return may assume no commissions. Or it may reflect a narrow time period rather than overall performance, says Mr. Hulbert. "Someone with a 15-year track record may end up picking one quarter or one year to talk about," he says. "They're telling the truth, but not the whole truth."
Another questionable practice, which Mr. Hulbert says has been used by some newsletters, is for a portfolio manager to claim to be top-rated among their "real competition."
"This," he says, "would be as though you were graded on a curve, and you got to pick the people you're graded against."
The lesson, says Mr. Pilot, is to "be diligent in checking facts that people give you, never take things at face value."